Prepared by Tobias Haque with inputs from Zeinab Partow, Lilia Razlog and Signe Zeikate Macroeconomics and Fiscal Management Global Practice

The World Bank Group

DEBT MANAGEMENT IN A DYNAMIC WORLD Coping with Capital Flows and Hidden Risks

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Executive Summary

This note summarizes findings of the World Bank Debt Management Facility Stakeholders’ Forum, held

in Manila, Philippines during June, 2015. At this event, more than 140 stakeholders from around the world

discussed recent global developments in debt management. The following key messages emerged from the

discussion:

The global economic crisis has demonstrated the centrality of debt management as a

macroeconomic policy issue. Debt issues have been central to policy responses to the economic crisis,

and will be vital to managing ongoing challenges and risks. The crisis has highlighted: the importance

of coordination between debt operations for fiscal and monetary policy purposes; the need for robust

debt sustainability analysis; the risks posed by inadequate recognition of contingent liabilities; and the

potential role of fiscal rules in mitigating vulnerabilities – especially for commodity exporting

countries.

The role of debt managers continues to evolve and become more complex. As income levels rise,

developing countries are becoming increasingly reliant on commercial sources of financing, seeking to

reorient portfolios towards domestic debt, and pursuing broader policy agendas for fiscal

decentralization and the delivery of public services through state-owned enterprises and public-private

partnership models. Debt managers therefore face new responsibilities, at the level of both central and

sub-national government, in managing relationships with investors, developing domestic securities

markets, and recording and monitoring contingent liabilities.

Coordination between debt management and other areas of economic policy remains vital but is

often challenging. Whether in coordinating debt operations between monetary and fiscal authorities or

establishing the broad enabling environment for an efficient domestic securities market, close

coordination and shared purpose between those working on debt and other areas of economic policy is

vital.

A sound macroeconomic framework and adequate legal and regulatory institutions are

prerequisites for many policy goals of debt management. Domestic security markets will not

flourish if inflation is not controlled. Subnational governments will struggle to meet financing needs

through commercial borrowing at reasonable cost if appropriate public financial management systems

are lacking. Meeting the communication and transparency expectations of international investors will

be difficult if debt management and reporting responsibilities are fragmented across agencies and

governed by different laws. In many cases, policy attention can usefully focus on establishing the

requisite enabling conditions before pursuing more advanced technical reforms.

Capacity constraints continue to present challenges to effective debt management in many

countries. As evidenced by Debt Management Performance Assessment scores, many countries still

lack the capacity to fulfil basic debt management functions. Capacity building efforts are effective and

are having a perceivable impact on the quality of debt management practices. But such efforts always

take time and are subject to backsliding as staff turnover and political priorities change. As the roles of

debt managers continue to evolve, it will be important to ensure that scarce debt management capacity

and capacity building efforts are carefully prioritized towards the most pressing debt management

challenges, which will vary by country and over time.

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1. Introduction

Impacts of the global financial crisis continue to reverberate through the global economy. Global capital

flows are yet to recover to pre-crisis levels, recovery in output is still incipient and vulnerable to reversal,

and many emerging and advanced economies have depleted policy buffers available to deal with potential

new crises and shocks. Expected divergence in global policy responses, especially in regards to the

unwinding of unconventional monetary policies in major global economies, generates new uncertainties.

These events have placed unprecedented focus on debt and debt management as core issues for economic

development. Advanced economies have become increasingly indebted, while developing and emerging

economies face increased dependence on domestic and international commercial debt, as the trend of

graduation from access to traditional multilateral concessional financing continues. Recent shocks and

volatility have highlighted the need for strong debt management practices in many areas, including debt

sustainability analysis, management of contingent liabilities, and management of subnational debt while –

in many countries – institutions and capacity for effective debt management continue suffer from important

weaknesses. Governments also face new challenges of coordination across macroeconomic policy levers in

a volatile macroeconomic environment while also facing increased levels of scrutiny from domestic and

global investors.

In June, 2015, debt managers from around the world met in Manila, Philippines to take stock of recent

developments and discuss emerging challenges. The World Bank Debt Management Facility Stakeholders’

Forum brought together more than 140 stakeholders from around the world, including policy makers, debt

managers from developing countries, donors, researchers, and representatives of civil society, international

organizations, and the private sector. This note presents highlights of the discussion at the conference.

The note is divided into four parts. Part one summarizes discussion of recent macroeconomic developments

and the global economic outlook and implications for debt management, especially in relation to

management of commodity prices shocks, policy coordination, and debt sustainability. Part two explores

the expanding role of modern debt managers, especially in developing countries, where increasing access

to domestic debt markets and broader risk management responsibilities bring new challenges. Part three

summarizes presentation of new debt management tools, recently developed to help debt managers address

these new challenges. Part four concludes by drawing out common themes and messages.

1. Debt Management Challenges in a Changing Global Economy

Recent global economic developments have highlighted the importance of debt management as a

macroeconomic policy issue. Macroeconomists have long been concerned with aggregate debt levels and

the possibility of debt crises. The continued relevance of these concerns was made clear in dedicated

sessions on debt sustainability analysis and the impacts of recent commodity price declines in resource

economies. But recent country experiences have also shown that debt management has much broader

macroeconomic implications, with composition of debt portfolios, depth of domestic debt markets, and the

adequacy of systems for managing contingent liabilities all playing important roles in determining

countries’ capacity to absorb shocks and effectively wield macroeconomic policy instruments.

Several sessions during the conference explored recent macroeconomic developments and the theme of

debt management as a macroeconomic policy issue.

Macroeconomic Context

Presentations on recent macroeconomic developments were delivered by Mr. Juzhong Zhuang (Deputy

Chief Economist and Deputy Director General, Economic Research and Regional Cooperation Department,

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Asian Development Bank), Mr. Odd Per Brekk (Director, Regional Office for Asia & the Pacific,

International Monetary Fund), and Ms. Kristine Romano (Associate Principal, McKinsey & Co.) in a

session facilitated by Mr. Mark Roland Thomas (Practice Manager, Macroeconomics and Fiscal

Management Global Practice, World Bank Group).

This session set the macroeconomic context for the conference, including discussion of monetary policy

conditions in major markets, changes in global capital flows, commodity price trends, and the availability

of policy buffers to deal with future shocks.

Presenters consistently noted that the impacts of the global financial and economic crisis are still being felt

across the global economy. Most notably, while policy rates remain extremely accommodative across

advanced economies, expectations are increasingly diverging regarding the pace of normalization of

monetary policy settings between the United States and the Eurozone. This context presents several

challenges, including the risks of unusually low interest rates, the unpredictable exchange rate dynamics

arising from uncoordinated normalization, and a potential reversal of recent capital flows into emerging

markets as yields improve in advanced economies.

Risks of capital reversal, however, are somewhat mitigated by the continued sluggish pace of cross-border

flows. Global capital flows remain well below pre-crisis levels, with commercial bank cross-border lending

showing little sign of recovery (See Figure 1). The decline in cross-border lending can be explained by a

combination of regulatory changes, weaknesses in bank balance sheets, and macroeconomic factors.

Participants generally considered these declines to support improved financial stability of host countries,

with cross-border lending compounding adverse domestic and global shocks. Foreign direct investment has

exhibited relative resilience throughout the post-crisis period, and remains the major – and relatively stable

– source of capital inflows to emerging and developing markets.

Figure 1: Capital Inflows by Type – All Developing Countries

Source: International Debt Statistics, World Bank Group

Commodity price trends were another important area of discussion. Recent oil price reductions have been

almost unprecedented in their pace and magnitude. While the aggregate impact of these developments is

unambiguously positive for the global economy, they present severe challenges to many commodity

exporters. With some recovery of oil prices now expected, participants noted that current low prices present

an opportunity for emerging economies, especially, to curtail heavily regressive fossil fuel subsidies.

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Official FDI Commercial Banks

Portfolio and Private Bonds PPG Bonds Total

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Several presenters noted important differences across countries in terms of capacity to deal with future

shocks. Throughout the post-crisis period, low and lower-middle income countries have generally been able

to avoid rapid debt accumulation, protecting improvements in headline debt ratios achieved through debt

relief since the 1990s. Many advanced economies, on the other hand, have seen rapid increases in both

public and private debt, with quantitative easing moving debt from private to public sector balance sheets.

In combination with already-low interest rates, policy space for dealing with future adverse shocks is

limited in several important economies.

Policy Coordination

Presentations on policy coordination were delivered by Mr. Dominique Desruelle (Deputy Director,

Institute for Capacity Development, International Monetary Fund), Mr. José Miguel Costa (Chief

Economist, Head of Research Unit, Treasury and Debt Management Agency, Portugal), Mr. Stephen M.

Vajs (Cash and Debt Management Expert),and Mr. David Lezhava (Deputy Minister, Ministry of Finance,

Georgia), in a session chaired by Dr. Y. V. Reddy (Chairman of the 14th Finance Commission and former

Governor of the Reserve Bank of India).

The session focused on the inter-linkages between debt management, monetary policy, and fiscal policy.

Presenters reviewed the potential for conflict between debt issuance for monetary and fiscal policy

objectives, options for managing and reducing potential conflicts, and particular challenges presented by

cross-border flows.

The potential for conflict between debt issuance for monetary and fiscal policy objectives is well

established. Government debt issuance helps to develop and establish benchmark prices within the domestic

capital market, assisting financial sector stability and growth, and impacting on the effectiveness of

monetary transmission mechanisms. Debt issuance by the Government can constrain the options open to

monetary policy authorities, and vice versa. Even with a fixed amount of public domestic borrowing, the

maturity structure of Government debt can have a major impact on the shape of the yield curve, influencing

monetary conditions even without any changes to primary monetary policy levers. Given the extent and

complexity of these inter-linkages, there is risk that policy actions will conflict.

Presenters noted that accurate cash forecasts and an associated borrowing plan, to which the monetary

authorities have easy access, can be useful in providing an anchor for coordination. Both monetary and

fiscal authorities should be aware of each other’s debt issuance plans, including maturity structure, so that

market needs are not left unmet or overwhelmed, and debt operations do not conflict. Operational

coordination can be achieved by appointing the monetary authority as an agent for the government in

issuance of domestic securities. But in such cases, the central bank should indicate clearly to the market

when it is operating as an agent of government and when it is seeking to alter money market conditions for

monetary policy purposes to avoid any perception that roles are being conflated or the independence of the

central bank curtailed.

Current market conditions and challenges bring new urgency to problems of policy coordination. Emerging

economies are increasingly relying on non-resident investors to purchase longer-term securities, posing

challenges to financial sector resilience, monetary policy, and exchange rate management. In a post-crisis

context of higher debt levels in advanced economies, increased potential for market volatility, and tighter

macro-prudential controls, a tightening of global liquidity is likely. Reduced capacity to issue securities

magnifies the importance of careful cash management and – more broadly – prudent risk management,

including the recording and management of contingent liabilities. Development of secondary securities

markets can help offset liquidity challenges, with central banks and finance ministries having a core role to

play in building confidence and market depth through regular and predictable issuances.

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Debt Sustainability Issues

Presentations on the Debt Sustainability Framework were delivered by Mr. Myrvin Anthony (Senior

Economist, Strategy, Policy and Research Division, International Monetary Fund), Ms. Sharon Almanza

(Deputy Treasurer, Philippines), and Mr. Pen Thirong (Deputy Director General, Department of Budget,

Ministry of Economy and Finance, Cambodia), in a session chaired by Ms. Sirpa H. Jarvenpaa (Director,

Operations Planning and Coordination Division, Strategy and Policy Department, Asian Development

Bank).

During this session officials from the Philippines and Cambodia presented their country cases and the IMF

presented recent policy changes regarding debt conditionality.

Philippines has developed relatively advanced debt sustainability analysis (DSA) incorporating stochastic

modeling of macroeconomic shocks. The framework explicitly models the impact of extreme weather

events on key debt indicators based on evidence from historical damage and losses. Cambodia remains in

the earlier stages of developing its debt sustainability analysis capacities, and is accessing World Bank and

IMF technical assistance on a regular basis. Debt sustainability analysis in Cambodia is based on financing

needs included in the country’s medium-term development plan, and is used to define borrowing limits.

Cambodia is now seeking to deepen capacity in stress testing to ensure improved rigor in undertaking DSAs.

The Cambodian case is consistent with a broader trend of lower income countries increasingly seeking to

boost growth through higher public investment levels, targeted in particular at large infrastructure gaps,

while facing both a wider range of external financing opportunities and limits on the supply of traditional

concessional financing. In response, the IMF has recently announced a new debt limits policy, which was

discussed in detail during this session.

Under the new policy, debt conditionality will be deployed by the IMF in cases where countries which do

not normally rely on concessional financing are judged to have significant debt vulnerabilities, as assessed

while applying the Market Access Country (MAC) DSA. In such cases, limits on debt will be specified in

terms of the nominal value of debt, with the precise specification depending on country circumstances,

including the quality and availability of data. The revised policy was to take effect at end-June 2015. Ahead

of this effective date, staff are providing training to governments in the implementation of the new policy

based on the Guidance Note that will be soon published, and arranging outreach activities to communicate

the new policy to development partners and other stakeholders. A stock taking of implementation of the

new policy will take place no later than 3 years after the policy takes effect.1

Managing Commodity Price Shocks

Presentations on managing the impacts of commodity price shocks were delivered by Mr. Hermann von

Gersdorff (Consultant, Chile), Mr. Matthew Martin (Director, Debt Finance International), Mr. Ian Storkey

(Director, Storkey & Co. Ltd.), and Ms. Gerelchimeg Tsogtbaatar (National Consultant, Fiscal Policy and

Planning Department, Mongolia) in a session chaired by Hon. Cassiel Ato Forson (Deputy Minister of

Finance, Republic of Ghana).

This session focused on the implications of commodity price trends from a macroeconomic and fiscal

sustainability perspective. Participants noted the differential impacts of commodity price changes across

1 The policy document is available here: http://www.imf.org/external/np/pp/eng/2014/111414.pdf

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countries, the particular vulnerabilities of low-income commodity exporters, and the potential usefulness

of fiscal rules for managing commodity price shocks.

While providing an impetus to growth and supporting improvements in fiscal and external balances for

many countries, the impacts of oil price declines have not been uniformly positive. Low-income commodity

exporters are heavily exposed to commodity price shocks and recent oil price developments can be linked

to several adverse debt-related trends including: i) increasing and potentially unsustainable levels of

commercial borrowing; and ii) capital outflows and slowing of foreign direct investment.

These developments often reflect inherent policy constraints facing many low-income counties. With low

levels of public expenditure, and the public sector providing a vital source of formal employment, there is

limited scope for consolidation on the expenditure side. Undiversified economies and heavy resource

dependence mean that declines in natural resource tax revenues can have major impacts. Weak monetary

transmission mechanisms limit the effectiveness of offsetting monetary responses. Given these domestic

constraints, some participants argued that more comprehensive international support was required for such

countries, potentially including: i) increased recognition of commodity price vulnerabilities in debt

sustainability analysis; and ii) more comprehensive approaches to international taxation of firms operating

in extractive industries, with an explicit focus on reducing transfer pricing practices.

Presenters also discussed successful country experiences with managing commodity price vulnerabilities

through the implementation of fiscal rules. A key conclusion from discussion was that such rules can only

be realistically implemented when the fiscal situation is favorable, given the vital importance of sustained

political commitment. Participants also emphasized that implementation of such rules should not be viewed

as a one-off reform, but rather an ongoing, iterative, and highly political process requiring broad stakeholder

engagement and political leadership.

The role of sinking funds and sovereign wealth funds in managing commodity price shocks has been much

discussed over recent years. Establishment of such funds is a popular policy prescription for dealing with

the “resource curse”. But with many governments facing a negative carry on sovereign wealth fund

balances, the desirability of capitalizing funds relative to accelerating the paying down of debt or increased

capital infrastructure investment is not always clear. Participants discussed the issue from different

perspectives, but noted that such funds can play an important political role even if not economically optimal.

Balances of such funds can be more-easily communicated than complex debt ratios or other fiscal

information, facilitating civil society oversight and political buy-in.

A clear message from the discussion was that commodity price vulnerabilities and risks need to be much

more deeply integrated into debt management practices. While a small number of advanced economies have

incorporated sensitivity analysis of different commodity price scenarios into debt reporting and debt

sustainability analysis, the vast majority of debt offices do not systematically consider or model the impact

of commodity price changes. This is an important area for future efforts given the potentially significant

impact of commodity price volatility in developing economies.

2. The Expanding Role of Debt Managers

The number of countries falling within the low income classification has halved since 2001. Higher income

has curtailed access to concessional official debt for many developing countries, but increased access to

domestic and global commercial credit markets. Trends towards utilization of public-private partnership

models in the provision of public goods have driven demand for central government on-lending and

guarantees, while increasing degrees of fiscal decentralization have driven rapid increases in borrowing at

the level of sub-national governments. In this context, the debt management office can no longer focus

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simply on traditional tasks of contracting, managing, recording and servicing loans. Rather, the modern

debt manager has a much broader role in overall risk management through developing domestic debt

markets, communicating with domestic and external market participants, and monitoring and managing

contingent liabilities. The broadening role of the modern debt manager was a second key theme of the

conference.

Domestic debt markets

Presentations on domestic debt markets were delivered by Ms. Alison Harwood (Practice Manager, Finance

and Markets Global Practice, World Bank Group), Mr. Bernard Thiam Hee Ng (Senior Economist,

Macroeconomic Research Division, Economic Research and Regional Cooperation Department, Asian

Development Bank), Mr. Juan A. Ketterer (Division Chief, Capital Markets and Financial Institutions

Division, Inter-American Development Bank), and Ms. Pimpen Ladpli (Senior Expert on Bond Market

Development) in a sessions chaired by Mr. Noritaka Akamatsu (Senior Advisor, Regional and Sustainable

Development Department, Asian Development Bank).

This session focused on the increasing importance of domestic borrowing for emerging and developing

countries. Presenters and participants discussed constraints to and priorities for accelerated domestic market

development, with a focus on the Asia region.

Domestic debt issuance has increased substantially in emerging markets since the early 2000s and now

comprises an average of 81 percent of total public sector debt across all emerging market economies. As

countries have progressively graduated from eligibility for concessional external debt through international

financial institutions and bilateral donors, domestic borrowing has played an important substitution role.

More recently, global investors have sought to participate in emerging economy debt markets, attracted by

relatively high yields in the context of very low advanced economy interest rates. Policy impetus for

development of domestic debt markets has also been fueled by the demonstrated risks of reliance on cross-

border capital flows. By developing domestic markets, emerging economies gain not only a source of

financing, but also support increased financial sector resilience, better absorption of capital inflows to

government securities markets, and improved capacity to finance countercyclical fiscal policies in the event

of shocks. Government securities markets also create opportunities for other issuers, establishing a yield

curve, and supporting the establishment of market infrastructure.

Figure 2: Emerging Market Sovereign Domestic Debt

Source: JP Morgan

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Common challenges are observed across countries in efforts to develop domestic debt markets. Illiquidity

in secondary markets can persist even after primary markets have been well established. An absence of

trained and specialized investors often curtails initial efforts at domestic market development, while the

investor base can be expected to remain relatively thin compared to advanced economy markets. Weak

capacity within government combined with illiquid markets mean that government funding plans and

operations are not always adhered to, undermining confidence. Institutional problems, including lack of

role clarity and coordination between various government agencies can persist even within relatively well-

developed markets.

More generally, the enabling market for domestic debt market development should be an important concern

for policy makers. Macroeconomic and financial sector stability are essential to building an efficient market

and establishing the credibility of the government as an issuer of debt securities. Prerequisites for

establishing an efficient government domestic currency securities market include a credible and stable

government; sound fiscal and monetary policies; effective legal, tax, and regulatory infrastructure; secure

settlement systems; and a liberalized financial system. Establishing these conditions should be the primary

focus of governments seeking to develop domestic debt markets, and it is important to acknowledge that

many of the requirements are well beyond the responsibilities of debt managers. A coordinated cross-

government approach is therefore required.

The Asian experience presents a model for other emerging countries and regions. With increasing scarcity

of external concessional support during the early 1990s, emerging markets within the region became

increasingly reliant on private cross-border flows. Currency and maturity mismatches, with private banks

borrowing short-term in USD and lending long-term in domestic currencies, were key contributors to the

Asian financial crisis. Since then, policy-makers have sought to mitigate the reemergence of such risks

through facilitating the development of regional financial markets, including through promoting local

currency corporate bonds. Efforts are ongoing to promote the regional bond market, with the recent

establishment of an online portal to provide potential investors with full information on bond issuances

across the ASEAN+3 countries. A taskforce has been established to harmonize instruments and regulations

across the ASEAN+3 and a regional issuance mechanism has been established whereby qualified issuers

from the ASEAN+3 can issue within any member country and currency. Partly as a result of these

initiatives, intra-regional cross-border bond holdings continue to increase and comprised 11 percent of total

holdings in 2013.

Debt management transparency and communication

Presentations on debt management transparency and communication were delivered by Mr. Karby Leggett

(Head, Public Sector Development Organization, Asia, Standard Chartered Bank), Ms. Inese Sudare

(Deputy Director of Financial Resources Department, the Treasury of the Republic of Latvia), Mr. Iqbal

Abdullah Harun (Joint Secretary, Finance Division, Ministry of Finance, Government of Bangladesh), and

Mr. Luiz Fernando Alves (Head of Risk Management Unit, Public Debt Strategic Planning Department,

National Treasury of Brazil), in a session chaired by Mr. Juan Carlos Pacheco (Adviser, Office of the

Executive Director, International Monetary Fund).

This session focused on the increasing importance of transparency and communications in debt

management. Presenters identified causes of this renewed focus on communication and the various

responses of debt management offices in several diverse country contexts.

Sovereign balance sheets have come under greater scrutiny in post-GEC world. This scrutiny reflects not

only recent increased indebtedness across advanced economies, but also an expectation of continued global

financial volatility, with the uncoordinated phasing out of unconventional monetary policy in major

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markets. Maintaining credit ratings is a growing focus for many countries given creditors’ increased

sensitivity to sovereign risk. In this context, debt managers have a core role to play in shaping external

perceptions.

Ensuring quality and comprehensiveness of public debt reporting and production of debt management

strategies can represent an ‘easy win’ in terms of having a large impact on external perceptions while

involving very limited costs to government. Debt managers can also support perceptions of sound debt

management through close adherence to auction schedules or calendars.

Debt managers also have the opportunity, however, to actively shape the perceptions of market participants

and rating agencies through various kinds of proactive outreach. Debt managers can arrange meetings with

rating agencies in their headquarters, allowing greater information flow than might be possible during rating

agencies’ short and sometimes infrequent visits. Debt managers can also help investors and rating agencies

better understand the context through field trips or arranging meetings with a broader set of stakeholders

than those typically included on short visits to capitals. Debt managers may wish to supplement regular

publications with releases of additional data and content that deals with specific areas of interest for

investors or rating agencies. Building relationships with journalists and media outlets can also help with

preemptively shaping market perceptions and ensuring the availability of complete information.2

Some countries, such as the Philippines, are achieving demonstrable benefits from more proactive

approaches to investor and rating agency engagement, including improved ratings, lower costs of credit,

and increased investor involvement in the real economy. The picture is very mixed, globally, however, with

many countries still struggling to meet basic reporting requirements under difficult institutional and legal

frameworks. Clear communication of debt information is difficult in countries where responsibility for debt

management is separated across different agencies and guided by several different laws. Again, establishing

sound institutional and legislative frameworks for basic debt management is typically a pre-requisite to

developing and implementing more active communication and outreach strategies.

Contingent liabilities

Presentations on contingent liabilities were delivered by Mr. Antonio Velandia-Rubiano (Lead Financial

Officer, Financial Advisory, Banking and Debt Management Department, World Bank Group), Mr.

Stanislaus Nkhata (Macroeconomic and Financial Management Institute of Eastern and Southern Africa),

and Mrs. Lerzan Ulgenturk (Advisor to the Director General of Public Finance, Undersecretariat of

Treasury of the Republic of Turkey) in a session chaired by Mr. Deepak Taneja (Principal Treasury

Specialist, Treasury Department, Asian Development Bank).

This session focused on the range of contingent liabilities facing national and subnational governments,

recent drivers of trends towards increased recognition of contingent liabilities, and good practices for the

management of associated risks.

Presenters emphasized that many of the liabilities facing a government are to some extent contingent. There

is a spectrum along which liabilities should be considered contingent or existing, with existing direct

obligations at one end, and indirect possible future obligations at the other. A typology of liabilities

including categorization between direct and indirect liabilities and explicit and implicit liabilities can help

to illustrate the broad range of potential contingent liabilities.

2 These principles are reflected in recently revised IMF and World Bank Group guidelines, available here: https://www.imf.org/external/np/pp/eng/2014/040114.pdf

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Figure 3: Typology of Government Liabilities

Direct liabilities Indirect liabilities

Explicit liabilities

(Legal obligation, no choice)

Foreign and domestic sovereign debt Budget expenditures—both in the

current fiscal year and those legally binding over the long term (civil servant salaries and pensions)

Guarantees for borrowing and obligations of sub-national governments and SOEs

Guarantees for trade and exchange rate risks

Guarantees for private investments State insurance schemes (deposit

insurance, private pension funds, crop insurance, flood insurance, war-risk insurance)

Implicit liabilities

(Expectations – political decision)

Future public pensions if not required by law

Social security schemes if not required by law

Future health care financing if not required by law

Future recurrent cost of public investments

Defaults of sub-national governments and SOEs on nonguaranteed debt and other obligations

Liability clean-up in entities being privatized

Bank failures (support beyond state insurance)

Failures of nonguaranteed pension funds, or other social security funds

Environmental recovery, disaster relief

Source: Polackova, Schick (editors), Government at Risk, 2002, p. 23

Changing perceptions regarding the respective roles of public and private sectors have seen increased use

of state-owned enterprise and public-private partnership structures for the delivery of public goods over

recent decades. Presenters noted that, while sometimes achieving efficiency improvements, these structures

have also sometimes obscured the allocation of costs and risks. Rapid and unexpected deterioration of

national and sub-national balance sheets during the global financial crisis highlighted the extent to which

frameworks for recording and managing contingent liabilities need to be expanded and improved.

Governments facing poor revenue performance saw deficits rapidly expand in the context of low growth

rigid expenditures, political pressure for increased investment in social protection programs, weak

performance of state-owned enterprises, and deteriorating credit conditions. These costs could often have

been reduced if appropriate systems were in place to recognize these risks ex ante.

Managing and monitoring risks associated with these structures can be capacity-intensive and involved. In

discussion regarding good practice requirements, participants identified the following elements: i) explicit

definition of the risk, in terms of the extent of the liability that resides with government; ii) risk analysis,

involving assessment of the likelihood that the liability will be realized (for example, through financial

modeling or other monitoring of entities that have been provided with a guarantee); iii) risk quantification,

in terms of expected losses, market value, maximum probably exposure or similar metrics; and iv)

application of risk management measures, such as structuring contracts to reduce risks, setting limits on

risk exposures, provisioning for possible losses, and reporting and regularly monitoring risks.

The quality and comprehensiveness of systems in place for meeting good practice standards remains highly

variable across countries, partly due to the associated capacity requirements. A recent study of nine sub-

Saharan African countries, for example, found important gaps in the frameworks for management of

contingent liabilities. While legal frameworks typically included coverage of guarantees, there were

important gaps in the legislative framework for PPPs and on-lending to SOEs. Information and reporting

on contingent liabilities is generally incomplete, while there is inadequate provision made for realization of

contingent liabilities in annual budgets across all countries covered. Establishing improved institutional and

legal frameworks for creation (for example through guarantees, on-lending and PPPs), monitoring and

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reporting of contingent liabilities is a pressing priority for many countries and must be pursued before more

advanced approaches to risk analysis and risk management can be deployed.

Subnational debt management

Presentations on sub-national debt markets were delivered by: Mr. Yee Farn Phua (Associate Director,

Sovereign & International Public Finance Ratings, Standard & Poor’s), Ms. Biljana Bogicevic (Assistant

Minister, Debt Management Department, Ministry of Finance of Republika Srpska), and Mr. Mohammed

Abubakar (Head, Debt Management Department, Ministry of Finance, Sokoto, Sokoto State, Nigeria) in a

session chaired by Ms. Abha Prasad (Lead Debt Specialist, Macroeconomics and Fiscal Management

Global Practice, World Bank Group).

This session focused on the growing importance of subnational borrowing in emerging markets and

developing countries. Participants discussed the drivers of increased sub-national borrowing, the major

constraints to effective subnational debt management, and the associated risks.

Subnational governments in many developing and emerging economies are increasingly utilizing debt

financing to meet infrastructure and other capital investment needs in the context of recent trends towards

fiscal decentralization and rapid urbanization. If well-managed, sub-national borrowing can bring many

benefits, including: i) alleviating financing demands on central governments; ii) deepening domestic bond

markets; and iii) strengthening incentives for improved financial management, due to market scrutiny of

investment projects and government creditworthiness. If managed poorly, however, subnational borrowing

can generate unexpected costs that undermine delivery of vital public services or pose fiscal risks to central

governments. Capacity and institutional constraints often undermine effective debt management at the level

of subnational governments, but broader governance and financial management weaknesses also frequently

need to be addressed.

Many local governments still lack adequate capacity to effectively manage their debt and deal with investors

and capital markets. With a limited pool of qualified staff to draw from, a shortage of specialized skills can

lead to inadequate specialization and a blurring of roles. While capacity building efforts are important and

ongoing, subnational governments also face problems with high staff turnover, and staff benefitting from

training frequently take newly-acquired skills to more attractive positions in national government or the

private sector. In the context of structural weaknesses in capacity, many sub-national governments lack the

basic systems and processes in place required for effective debt management.

Inadequate capacity in debt management, however, is only part of the problem. Ratings agencies and

potential creditors are equally concerned with broad issues of transparency, financial management, capacity

to raise revenue, and overall management of fiscal risks. Addressing debt management challenges is

therefore equally reliant on addressing broader weaknesses in institutional arrangements (within local

governments and between local and national governments), public financial management, and accurate

recording of contingent liabilities and fiscal risks.

Continued capacity building in debt management is therefore vital if sub-national governments are to realize

potential benefits of increased access to debt. But such efforts need to be embedded within broader

programs to build public financial management capacity and ensure appropriate institutional arrangements

between central and subnational governments. Participants noted that benchmarking tools can prove an

important mechanism to both motivate and demonstrate improvement.

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3. Benchmarking Tools for Debt Management and Debt Markets

Reflecting the increased complexity of debt management, the World Bank Group has developed specific

methodologies to support improved policies and practices. The Debt Management Performance Assessment

has been applied since 2008 to assist countries diagnose and address constraints to effective debt

management. In 2015, the Government Securities Market Assessment tool was launched, utilizing a similar

methodology to identify constraints to domestic debt market development and inform reform processes and

priorities. These two tools were discussed in detail in dedicated sessions.

Debt Management Performance Assessment and Results

Presentations on the Debt Management Performance Assessment were delivered by Ms. Lilia Razlog

(Senior Debt Specialist, Macroeconomics and Fiscal Management Global Practice, World Bank Group),

Mr. Rafael Otieno (Director, Macroeconomic and Financial Management Institute of Eastern and Southern

Africa), and Mr. Baba Musa (Director, West African Institute of Financial and Economic Management) in

a session chaired by Mr. Tomas Magnusson (Chair, DMF Panel of Experts).

The Debt Management Performance Assessment (DeMPA) is a methodology for assessing public debt

management performance through a comprehensive set of performance indicators spanning the full range

of government debt management functions. Using a ‘scorecard’ format, the tool is used to check various

aspects of public debt management practice against global sound practice standards. Debt management

practices are evaluated and scored on an A-D scale across 14 indicators (comprising a total of 33 specific

‘dimensions’), with the score of C representing the minimum requirement for effective debt management.

The methodology is similar to the Public Expenditure and Financial Accountability Assessment, and the

approaches are fully aligned, with DeMPA allowing for ‘drilling down’ into the assessment of debt

management related public financial management practices.

The DeMPA is implemented by a team comprising both country and debt management experts, and

including both government officials and external specialists. Assessments are evidence based, with scores

assigned against each dimension based on collected quantitative and qualitative evidence. Findings from

assessments are presented in assessment reports that present scores and justifications.

The DeMPA methodology has recently been revised, with several changes made to the structure of the

assessment. An additional dimension has been added to the assessment of debt reporting and evaluation.

The Operational Risk Management and Debt Recording and Reporting areas have been consolidated into a

single Debt Recording and Operational Risk Management area, with the fifteenth indicator discontinued

under the revised methodology.

As of the end of 2014, the DeMPA methodology had been applied 91 times across 72 different countries,

with 18 countries having repeat assessments to trace progress. A key finding from the assessments is that

debt management significantly lags good practice across a wide variety of countries and regions, with more

than 50 percent of all rated dimensions allocated a score of D (i.e. below the minimum standard required

for effective debt management). Application of the framework has highlighted particular weaknesses across

countries in indicators assessing audit processes (89 percent D scores), the segregation of duties and

adequate staff capacity (84 percent D scores), and processes for issuance and management of loan

guarantees, on-lending and derivatives (81 percent D scores). Performance in coordination with monetary

and fiscal policy is relatively strong, with scores of C or better awarded in 62 percent of cases. 60 percent

of assessments gave a score of C or better against the indicator assessing the appropriateness of debt

management office managerial structure.

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Figure 4: DeMPA Scores – Proportion of countries meeting minimum requirements

Source: DeMPA Assessments

Presenters reported on Southern and West African experiences with the DeMPA tool, where it has been

applied in 12 and 15 countries respectively. The global pattern of high numbers of D scores was repeated

in these countries, with assessments highlighting weaknesses in audit processes, operational risk

management, cash management, and several other areas. By illustrating these weaknesses, the DeMPA

process has motivated significant improvements in debt management in many countries, including reviews

of legal frameworks for debt management, reviews of managerial structures, more regular conducting of

debt sustainability analyses, and production of debt management strategy documents. A much greater

proportion of countries now have adequate debt recording and management systems in place, with loan

negotiation teams increasingly including the full range of requires technical specialties, including the

presence of lawyers from early stages of negotiation.

Government securities market assessment

Presentations on the government securities market assessment tool were delivered by Mr. Baudouin

Richards (Member DMF Panel of Experts), Ms. Rekha G. Warriar (Chief General Manager, Internal Debt

Management Department, Reserve Bank of India), and Mr. Charles Anderson (Resident Advisor, Office of

Technical Assistance, the U.S. Department of the Treasury) in a session chaired by Ms. Alison Harwood

(Practice Manager, Finance and Markets Global Practice, World Bank Group).

With debt managers increasingly focused on development of domestic debt markets, the World Bank Group

has recently developed a new scorecard-based toolkit to diagnose existing constraints and inform policy

reform efforts. Like the DeMPA, the toolkit is intended to allow comparability over time and between

countries through use of a quantified measurement of the degree of efficiency in different markets.

Similar to the DeMPA and PEFA, the Government Securities Market Development (GSMD) toolkit is

structured by areas, indicators, and dimensions. It covers four core areas, including: i) enabling conditions,

including the adequacy of fiscal and monetary policies, capacity of the debt management unit, and size of

0%10%20%30%40%50%60%70%80%90%

100%Legal framework

Managerial Structure

Debt Management Strategy

Evaluation of Debt ManagementOperations

Audit

Coordination with Fiscal Policy

Coordination with MonetaryPolicy

Domestic BorrowingExternal Borrowing

Loan Guarantees, On lendingDerivatives

Cash Flow Forecasting and CashBalance Management

Debt Administration and DataSecurity

Segregation of Duties, StaffCapacity and BCP

Debt Records

Debt Reporting

Meet with the requirements of Score C or Higher Scores

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the investor base; ii) primary market, including the use of an annual borrowing plan, sound issuing

mechanisms, and the quality of borrowing instruments; iii) supporting markets, including structure and

transparency of the money market and effective operation of the secondary market; and iv) infrastructure,

regulation and taxation. A total of 10 indicators are used for the evaluation, with some indicators divided

into several dimensions and a total of 18 dimensions assessed. Also consistent with DeMPA and PEFA

methodologies, an A-D scale is used in scoring, with an A score signifying sound market practice and a C

score signifying minimum requirements met for effective functioning of the market.

The benchmarking approach provides benefits over alternative approaches to domestic market assessment

in terms of objectivity and comparability. Participants noted that the use of benchmarking can also help

motivate reforms by highlighting weaknesses and strengths relative to other economies. However, the

benchmarking approach is intended to be an input into reform efforts and does not substitute for judgment

in terms of prioritizing and implementing reforms. While the tool can provide a relatively objective

assessment of the situation, it cannot necessarily identify the binding constraints to market development or

identify high impact and politically and technically feasible reforms.

4. Conclusion

Recent global economic developments have demonstrated the centrality of debt management as a

macroeconomic policy issue. Debt issues have been central to policy responses to the economic crisis, and

will be vital to managing ongoing challenges and risks. The global economic crisis has highlighted the

importance of coordination between debt operations for fiscal and monetary policy purposes, the need for

robust debt sustainability analysis, the risks posed by inadequate recognition of contingent liabilities, and

the potential role of fiscal rules in mitigating vulnerabilities – especially for commodity exporting countries.

The recent crisis and response occurred against a background of longer-term evolution in the role of debt

managers. As income levels rise, developing countries are becoming increasingly reliant on commercial

sources of financing, seeking to reorient portfolios towards domestic debt, and pursuing broader policy

agendas for fiscal decentralization and the delivery of public services through state-owned enterprises and

public-private partnership models. Debt managers therefore face new responsibilities, at the level of both

central and sub-national government, in managing relationships with investors, developing domestic

securities markets, and recording and monitoring contingent liabilities.

In discussions of these developments, participants noted several common themes running through all

discussions. Firstly, many sessions emphasized the importance of linkages between debt management and

other areas of economic policy. Whether in coordinating debt operations between monetary and fiscal

authorities or establishing the broad enabling environment for an efficient domestic securities market, close

coordination and shared purpose between those working on debt and other areas of economic policy is vital.

Secondly, a sound macroeconomic framework and adequate legal and regulatory institutions are

prerequisites for many policy goals of debt management. Domestic security markets will not flourish if

inflation is not controlled. Subnational governments will struggle to meet financing needs through

commercial borrowing at reasonable cost if appropriate public financial management systems are lacking.

Meeting the communication and transparency expectations of international investors will be difficult if debt

management and reporting responsibilities are fragmented across agencies and governed by different laws.

In many cases, policy attention can usefully focus on establishing the requisite enabling conditions before

pursuing more advanced and specific reforms.

Finally, capacity constraints continue to present challenges to effective debt management in many countries.

As evidenced by DeMPA scores, many countries still lack the capacity to fulfil basic debt management

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functions. Capacity building efforts are effective and are having a perceivable impact on the quality of debt

management practices. But such efforts always take time and are subject to backsliding as staff turnover

and political priorities change. As the roles of debt managers continues to evolve, it will be important to

ensure that scarce debt management capacity and capacity building efforts are carefully prioritized towards

the most pressing debt management challenges, which will vary by country and over time.